Who comes up with mortgage calculators?

Question

I'm a single mother who has not debt a credit rating of 783 and pay 1415 in rent & that is just rent that doesn't include water, power, trash, phone, cable or anything else. Through those in and it's closer to $1800.I have no debt not even a car payment. I make sadly only about $40,000 dollars as an executive assistant. I don't live lavishly and while like any woman enjoy nice things I know when & what I can afford and live within my means though admit sometimes times are tight but I know what I can afford & never bite off more then I can afford even if I might like something better. I don't mind paying what I currently pay cheapier would be nice but still & yes I know about property taxes which where I live is about 10% paid twice a year. My point and question is I would like to buy a condo or house obviously it makes more sense so how come if I go to a "how much home can I afford" calculator it will tell me I can only afford a loan for $150,000 if that even at a fix rate and for 30 years. When even after taxes I would make well over that in 30 years.

Answer 1

Your house payment including taxes insurance & PMI must be 31% or lower of your monthly gross income. Your total debt can't exceed 43% of your gross monthly income. It is not based on what you will make, but total gross monthly income.

Answer 2

It’s called interest. A mortgage payment isn’t $150,000/360.  There’s interest charged on the money you borrow.  Just like if you charged something on a credit card & didn’t pay it off right away, you’ll pay more – because of interest – than you would have if you’d paid for it in cash. Realistically, buy the time you’ve paid off a $150K 30 yr mortgage, you’ve spent more than $300,000.

You should also bear in mind that online calculator rarely taken into account that you’ll normally pay property taxes & insurance as part of your payment so they’re not super reliable.

Answer 3

Only $40,000?  You're a lot better off than many people these days.

Do you have any money to make a down payment?  If you put down 20%, or $30,000, you'll get the best rate and avoid mortgage insurance.  If you haven't saved up $30,000, the higher percentage of the purchase price you borrow, the higher the rate and costs will be.  

$120,000 at 6.45% for 30 years is $755.  Using the same rate and term, if you borrow $150,000 the payment is $945.

Now add the taxes and home owners insurance and mortgage insurance to that, but the lender will have to get a credit report before they can tell you the rate or the amount of MI.  

Your monthly gross is $3,333.  The maximum debt load for you is probably going to be about $1500 to $1666.  783 is a very good credit score, but since you have very little debt and no previous mortgage history, you may not get the best rate available anyway.  A good credit score could allow a higher debt-to-income ratio, and a bad credit score less.  So, the total of all expenses that would show up on a credit report can not exceed the difference between the complete mtg payment and the debt load.

If you really have no other debt from credit cars, autos, student loans, etc, you should be able to afford about $150,000 (don't forget you have to add numbers we don't know for insurance, taxes and mortgage insurance).

Answer 4

When you buy a house on a fixed rate, fully amortized mortgage, your payment is calculated by a very complicated formula that says how much you will pay on the home each month, with some portion of that payment going to principal and the rest being the interest on the principal, such that the house is fully paid off during that 30-year period.

Using your $150K example on a loan at 6.5% fixed for 30 years, your monthly payment would be $948.10 principal and interest. But, only $135.60 of that first payment goes toward the principal. The other $812.50 goes toward interest.

So now you have a balance of $149,864.40 for the second month. Because the principal dropped a little bit (by $135.60), you're paying slightly less interest with your second $948.10 payment. And, in month 2, $136.34 goes to principal and $811.77 goes to interest.

And on it goes, with more of your payment being applied to principal and less to interest each month until the loan is paid off 30 years later.

In the first year of the loan, you will have paid $11,377.20 in total mortgage payments. But, $9,700.64 is interest and only $1.676.59 went to the principal. And in the second year, you still pay $11,377.20 in total payments. But now, only $9588.35 went to interest and $1,788.87 went to principal.

Over the lifetime of that loan, you will have paid $191,322.18 in interest, or a total of $341, 322.18 over the 30-year loan period for that $150,000 home.

But, when they figure how much you can afford, they look at your income versus expenses each month and figure that the most home you can buy is some multiple of your annual income (in this case, they used a very complicated formula that figured the maximum home you could afford is about 3.75 times your annual salary).

At $40K a year, you're making about $2000 a month after taxes. So, you would be spending nearly half your take-home pay on your mortgage. Then there's property taxes (usually 1.25% of the home value, or about 0.1% per month), which would be about $150 a month. Insurance would be maybe $100 a month. Then there's HOA fees for a condo (average about $250 a month). And, PMI (private mortgage insurance, which is mandatory for less than a 20% down payment) of maybe $200 a month. Now you're up to $1600 a month.

If you itemize your tax deductions, you can write off the mortgage interest and property taxes. So, figure you would be able to write off about $11,000 the first year, which means you would have about $4,400 less tax withholdings taken out of your pay, or about $367 a month in increased take-home pay. So, now you're back down to about $1,230 a month in home ownership costs. That leaves you with $770 a month to live on (food, gas, utilities, entertainment, and whatever else you spend money on each month to live).

So, do you really think you can live to your current means at less than $770 a month? Because if you bought more house, you would have higher payments and less to live on each month.

Answer 5

Nearly four times your salary is about the maximum you could expect.  If the calculator is telling you how much a lender would give you, that would be 80% of the value of the house so you'd have to put down a lot of money in addition.  The mortgage lenders are the ones who come up with mortgage calculators, and they go by very general kinds of rules.  They just multiply your salary by a certain amount and they usually tell you you can afford more than they'll lend you just to get you to call them.